Consider the following statements A drop in the price-dividend ratio predicts a significantly higher excess return on the market over the next 5 years An increase in the yield-to-maturity spread between BAA and AAA rated bonds predicts a significantly higher excess return on the market over the next year I. II. II. The price-to-earning ratio is a better predictor for future market excess returns in short horizons than long horizons Gold-to-platinum is a better predictor for the next month market excess return than the variance risk premium IV. Which statements are correct?

Consider the following statements A drop in the price-dividend ratio predicts a significantly higher excess return on the market over the next 5 years An increase in the yield-to-maturity spread between BAA and AAA rated bonds predicts a significantly higher excess return on the market over the next year I. II. II. The price-to-earning ratio is a better predictor for future market excess returns in short horizons than long horizons Gold-to-platinum is a better predictor for the next month market excess return than the variance risk premium IV. Which statements are correct?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Do solve all parts A. What risk premium do you use? Why? B. Why is the geometric mean lower than the arithmetic mean for both bonds and bills? C. If you had to use a risk premium with the longer periods, what biases will the investor have?
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Assuming a mild preference for shorter-term bonds, the liquidity premium theory suggests that a flat yield curve is an indication of: A) constant short-term interest rates in the near and further future. B) a slight rise in short-term interest rates in the near future and a slight decline in the further future. C) constant short-term interest rates in the near future and a slight decline in the further future. D) a slight decline in short-term interest rates in the near and further future. Support your answer using a numerical example and explain carefully all the assumptions you make.
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